Series 65 Test Questions #3

Under the Uniform Securities Act, the Administrator can require which of the following from broker-dealers and investment advisers? I. Filing of sales literature II. Maintaining of records III. Filing of financial statements IV. Filing of amendments to registrations A) I, II, III, and IV B) I and II C) II, III, and IV D) II and III

A) I, II, III, and IV Ex: The act requires the filing of sales literature and advertising (as well as a prospectus) addressed to or intended for clients or prospective clients, unless exempt under the act. In addition, it requires that books and records be kept for a minimum of three years for broker-dealers and five years for investment advisers and provides that an Administrator may require the filing of financial reports regarding the net worth of the firm. The act also requires broker-dealers and investment advisers to update any information filed with the state regarding any material change that takes place. Even federal covered investment advisers may be required to file copies of their SEC registration and amendments with state Administrators, along with filing fees.

An investment adviser representative (IAR) has several clients who are interested in adding precious metals to their portfolios. Which of the following is the IAR most likely to recommend? A) Platinum B) Nickel C) Copper D) Aluminum

A) Platinum Ex: The only one of these considered a precious metal is platinum. For the exam, there are likely only going to be three precious metals: gold, silver, and platinum.

Halethorpe has had a difficult time passing the Series 66 examination. He just tried again and failed for the fourth time. He will be eligible to try again in A) 30 days. B) 180 days. C) 6 months. D) 90 days.

B) 180 days Ex: Although we do not like to think about failure, the exam may ask you about the waiting time between exams. For the first two failures, one must wait 30 days before retrying the exam. If there is a third failure, the waiting period is 180 days (not six months) for the next and any subsequent attempts.

Your client has turned bearish on the market, but does not have a margin account. Which of the following securities would probably best meet your client's needs? A) A long call option B) An interest rate swap C) An inverse fund D) A balanced mutual fund

C) An inverse fund Ex: Those who are bearish wish to profit in a market downturn. Inverse funds are sometimes called short funds because they deliver positive returns when the underlying benchmark declines in value. This client can't sell short because you need a margin account for that.

As part of your annual review for clients, you perform a net worth computation. You have computed a specific client's net worth at $500,000. This client calls you and asks what his net worth will be after withdrawing $4,000 from his savings account to pay off credit cards, taking another $6,000 to deposit to his IRA and buying a $25,000 home theater system using store credit. You would respond that the client's net worth is now A) $466,000 B) $491,000 C) $475,000 D) $500,000

D) $500,000 Ex:In each case, we have an asset offsetting a liability so there is no change to the net worth.

In order for an individual to receive Social Security benefits based on the earnings of the ex-spouse, the couple must have been married for at least A) 1 year. B) 2 years. C) 5 years. D) 10 years.

D) 10 years. Ex: If a couple has been married for at least 10 years prior to divorcing, an ex-spouse may claim benefits. There are other requirements including unmarried status for the claimant.

High-yield bonds are frequently called junk bonds. Which of the following expresses the highest rating that would apply to a junk bond? A) CC B) CCC C) BBB D) BB

D) BB Ex: Investment-grade bonds run from a highest Standard and Poor's rating of AAA (Aaa for Moody's) down to BBB (Baa for Moody's). When the rating gets to BB (or Ba), the bond is considered high yield, or a junk bond.

What is the purpose of the Securities Exchange Act of 1934? A) It regulates the persons involved in the secondary market. B) It provides requirements relating to new issues. C) It provides standards among the states. D) It provides policies relating to unethical business practices.

A) It regulates the persons involved in the secondary market. Ex: The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.

A risk-averse client, living in the United States, holding a high proportion of his assets in cash and cash equivalents in U.S. dollars, is exposed to which of the following risks? A) Purchasing power risk B) Market risk C) Reinvestment rate risk D) Exchange rate risk

A) Purchasing power risk Ex: Although cash and cash equivalents (money market instruments) may assist in managing liquidity risk, they do have purchasing power, or inflation risk, because they have limited opportunity for capital appreciation. Exchange rate (currency risk) risk does not apply because this is a U.S. client with investments denominated in dollars. There is no market risk to cash and virtually none to cash equivalents. There is nothing to reinvest with cash and the returns and maturities on cash equivalents are such that reinvestment risk is not a concern.

The shares of the LMN closed-end management investment company are selling at $45, while LMN's net asset value (NAV) is $40. It would be most accurate to say that LMN's shares are trading at A) a 12.5% premium to NAV. B) an 11.1% discount to NAV. C) a 12.5% discount to NAV. D) an 11.1% premium to NAV.

A) a 12.5% premium to NAV. Ex: The shares are selling at a $5 premium to the NAV. Mathematically, this is $5 divided by the $40 NAV, or a 12.5% premium.

Computing the Sharpe ratio for a specific stock requires using all of the following except: A) the beta for the subject security. B) the actual rate of return for the subject security. C) the standard deviation of the subject security. D) the risk-free return available in the market.

A) the beta for the subject security. Ex: The formula for the Sharpe ratio is as follows: (actual rate of return minus the risk-free rate of return) divided by the standard deviation of the security. Beta is not a component.

One of your clients currently holds a short position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell stop B) Buy stop C) Sell limit D) Buy limit

B) Buy stop Ex: The risk to a short seller is to the upside (there is, at least theoretically, no limit as to how high the stock's price can go). To protect against an increase to the stock's price beyond the point the investor is willing to lose, it is wise to enter a buy stop order at that price. If the stock should reach that price, the order is triggered, a market order is entered, and the short position is closed out. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.

In comparing the change in the GDP from one year to another, to arrive at an accurate figure, each year's GDP should be converted to which of the following? A) Dollars in terms of gold bullion B) Constant dollars C) International dollars D) Dollars valued by exchange with foreign currencies

B) Constant dollars Ex: The GDP must be adjusted for inflation to get an accurate comparison from one year to the next.

Which of the following statements regarding Coverdell Education Savings Accounts are true? I. After-tax contributions of up to an indexed maximum per student per year are allowed. II. Unless a special needs beneficiary, contributions may not be made for students past their 18th birthday. III. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. IV. Distributions are always taxable. A) II and IV B) I and II C) I and III D) III and IV

B) I and II Ex: Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member. When the beneficiary is a special needs beneficiary (an individual who because of a physical, mental, or emotional condition requires additional time to complete their education), there are no age restrictions. Furthermore, unless something in the question refers to this beneficiary, always use the age 18 and 30 restrictions.

Which type of contract obligates both parties to act? I. Forward contract II. Futures contract III. Options contract IV. Warrant A) II and III B) I and II C) I and IV D) I, II, and III

B) I and II Ex: It is only in the case of forward and futures contracts that both parties are obligated to fulfill the terms of the contract. Only the seller of an options contract is obligated, and in the case of a warrant, it is the issuer of the warrant who is obligated to deliver the underlying shares if the owner exercises.

In which of the following business structures does the owner assume full liability? I. S corporation II. LLC III. Sole proprietorship IV. General partnership A) I and II B) III and IV C) II and III D) I and IV

B) III and IV Ex: Sole proprietors are the business and are fully liable for all debts incurred. Unlike limited partners, general partners carry full liability for any debts incurred by the partnership

Which of the following statements describes the federal funds rate? A) Charge on loans to depositary institutions by the New York FRB B) Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more C) Base rate on corporate loans at large U.S. money center commercial banks D) Charge on loans to brokers on stock exchange collateral

B) Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more Ex: The federal funds rate represents the interest charged on reserves, traded among commercial banks for overnight use, in amounts of $1 million or more.

Publicly traded corporations are subject to an annual audit of their financial records. Those audits must comply with GAAP (generally accepted accounting principles). When preparing to recommend a stock to a customer, you would most likely want to see that the auditor gave A) a qualified opinion. B) an unqualified opinion. C) a certified opinion. D) a comprehensive opinion.

B) an unqualified opinion. Ex: An unqualified, or clean, opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements.

The formula for calculating working capital is A) only the cash and equivalents − current liabilities B) current assets − current liabilities C) total assets − total liabilities D) current assets − inventory

B) current assets − current liabilities Ex: Current means cash or assets that would be exchanged for cash in the ordinary course of business in the current year. In the case of liabilities, current means maturing or falling due within the current year. The net of current assets less the current liabilities implies the company has cash availability of the remainder with which to work. Working capital uses all of the current assets; cash and equivalents leaves out the inventory.

An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term: A) senior adviser. B) investment counsel. C) pension consultant. D) financial planner.

B) investment counsel. Ex: The term investment counsel may only be used by those advisers whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts.

Regional Financial Services, LLC, is registered as an investment adviser in States A, B, C, and D. They have just filed an application for registration in State E. Registration of this investment adviser in State E automatically confers registration as an IAR in State E on A) an employee who will be soliciting clients for the adviser in State E. B) officers, partners, and directors of the firm who will be functioning in State E as IARs. C) any employee who is functioning as an IAR in State A, B, C, or D. D) clerical employees handling back-office operations.

B) officers, partners, and directors of the firm who will be functioning in State E as IARs. Ex: Under the Uniform Securities Act, registration of an investment adviser in a state automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true except A) this practice is ethical if full disclosure is made to all clients. B) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment. C) the adviser may collect fees for investment advice and commissions for executing trades. D) the adviser must state that the client may be subject to certain limitations because of this arrangement.

B) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment. Ex: In order for the investment adviser (IA) to sell securities products through any broker-dealer, affiliated or not, registration as an agent is required. Whenever an IA acts in an agency capacity with an advisory client, disclosure of the capacity and consent of the client must be received not later than completion of the trade. Please note that the consent does not have to be in writing. There are cases, such as agency cross transactions, where prior written consent of the client is needed. One of the limitations that must be disclosed is that dealing solely with proprietary products limits the universe of available recommendations.

An employer whose 401(k) plan complies with ERISA Section 404(c) is placing investment risk with A) the Securities and Exchange Commission. B) the plan participant C) the plan fiduciary D) the Internal Revenue Service

B) the plan participant Ex: In a 401(k) plan, a plan sponsor can shift investment risk to the employee by complying with ERISA Section 404(c) rules.

Your client asks for a recommendation for her emergency fund. You would most likely suggest A) a money market mutual fund because of its fixed rate of return B) a diversified common stock mutual fund because of its high degree of liquidity C) a money market mutual fund because of its high degree of liquidity D) a corporate bond mutual fund because of its high degree of income and liquidity

C) a money market mutual fund because of its high degree of liquidity Ex: The most appropriate vehicle for the emergency fund is the money market mutual fund because of its safety and high degree of liquidity. A money market mutual fund does not have a fixed rate of return. A common stock fund is too volatile and not appropriate for an emergency fund. A bond fund is subject to market volatility.

Under the Uniform Securities Act, it is legal for a brokerage firm to tell a client that A) when a security is registered with both the SEC and the state, it is a safe investment. B) a registered security has been approved for sale in the state by the Administrator. C) a registered security may lawfully be sold in that state. D) an exempt security is not required to be registered because it is safer than a nonexempt security.

C) a registered security may lawfully be sold in that state. Ex: A brokerage firm may indicate that a security is registered or is exempt from registration; all the other statements are prohibited

Plentitude Abundant Returns, (PAR) is a broker-dealer registered in a dozen states. The principal office is located in State X. To be in compliance with the Uniform Securities Act, PAR must satisfy the recordkeeping requirements of A) the state with the least stringent requirements B) the state with the most stringent requirements C) the SEC D) State X

C) the SEC Ex: The USA holds that federal law supersedes that of the states. The Securities Exchange Act of 1934 holds that no state can impose financial or recordkeeping requirements that exceed those of the SEC. Remember, unlike IAs who register with either the SEC or the states, broker-dealers, unless stated to the contrary, register with both. Once a BD is registered in more than one state, it must register with the SEC.

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Preferred stock B) Equity mutual funds C) Common stock D) Bond mutual funds

D) Bond mutual funds Ex: Qualified dividends are those eligible for reduced income tax rates. Those rates can be as low as 0% and as high as 23.8%, with most falling within the 15% to 20% bracket. We don't expect the exam to test on the requirements for a dividend to be considered qualified or how you reach that 23.8% rate. Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest.

An investor is considering purchasing an equity exchange-traded fund (ETF) to further diversify his portfolio. All of the following are reasons for him to purchase this investment except A) they have lower taxable distributions than most mutual funds. B) they have lower annual expenses than those of mutual funds. C) shares may be purchased and sold throughout the day. D) ETFs offer tax benefits similar to a limited partnership.

D) ETFs offer tax benefits similar to a limited partnership. Ex: Equity ETFs are organized as regulated open-end investment companies or unit investment trusts, not as limited partnerships. That means the tax benefit of the flow-through of operating income or loss does not apply. As regulated investment companies, they must distribute at least 90% of their net investment income and capital gains. However, the way in which capital gains occur is different, resulting in fewer taxable distributions than is the case with a mutual fund. Expenses are generally lower as well, and ETFs trade during the day just like any stock.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year, the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) There will be no tax consequences. B) He will have a $1,000 gain. C) He will have a $1,000 loss to carry over to the next year. D) He will offset $1,000 ordinary income this year.

D) He will offset $1,000 ordinary income this year. Ex: Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.

Which of these are true regarding a federal covered investment adviser? I. He has $110 million or more in assets under management. II. He manages an investment company registered under the Investment Company Act of 1940. III. He limits his advice to securities listed on the NYSE. IV. He is affiliated with a federally chartered bank. A) I, II, III and IV B) I and III C) II and III D) I and II

D) I and II Ex: Federal registration is generally required of any investment adviser managing at least $110 million in assets. The NSMIA provides that any investment adviser under contract to a registered investment company under the Investment Company Act of 1940 is required to register with the SEC as a federal covered adviser. Providing advice on federal covered securities listed on the NYSE does not make the adviser a federal covered adviser. Determining if one is a federal covered investment adviser is not based on affiliations; it is generally a function of AUM or managing an investment company.

Bachelier and Louis Associates, BALA, is an investment adviser registered in States W, X, and Y. BALA is completing the Form ADV to register in State Z. Which of these would be automatically registered as an agent in State Z simultaneously with BALA's effective registration? A) Wilson, the company's legal counsel B) Janice, the director of the company's information technology (IT) department C) Thomas, an IAR currently registered in States W, X, and Y D) Louise, vice president of the company's sales department

D) Louise, vice president of the company's sales department Ex: The Uniform Securities Act provides that registration of an investment adviser automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions. Supervising the sales department requires the individual to be an IAR. As an officer, Louise is listed on Form ADV and receives the automatic registration in the new state. This is limited to IARs who are in these specific positions or who are performing these functions. There is no reason for the head of an investment adviser's IT department to be an IAR.

Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Deferred annuities B) Section 529 plans C) Cash dividends D) Stock dividends

D) Stock dividends Ex: Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as a capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty

The long party is a futures contract that has entered the contract as A) a seller. B) a liquidity provider. C) a market maker. D) a buyer.

D) a buyer. EX: Long is the industry term describing the buyer of a futures contract. The long is committed to buying the underlying asset at the pre-agreed-upon price on the specified future date. Short is the industry term describing the seller of the futures contract. The short is committed to delivering the underlying asset in exchange for the pre-agreed-upon price on the specified future date. Market maker is a term used for securities, not futures, and liquidity provider is a concept that is not tested (as is the case with many incorrect answer choices).

All of the following permit investments into various securities, such as stocks, bonds, and mutual funds except A) a Roth IRA. B) a traditional IRA. C) an HSA. D) an FSA.

D) an FSA. Ex: Flexible spending accounts (FSAs) allow deductions from an employee's paycheck. That money is held by the company and is used to pay allowable claims by the employee. A health savings account (HSA) permits the employee to invest in a wide variety of securities. IRAs, traditional and Roth, have always permitted investment flexibility.

Each of the following would be considered a systematic risk except A) inflation risk. B) interest rate risk. C) market risk. D) regulatory risk.

D) regulatory risk. Ex: Regulatory risk applies only to that segment of the economy affected by those specific regulations.